The scheduled spending cuts account for $98 billion — or about one-fifth — of the federal budget impact of the fiscal cliff. Over half of this amount is due to sequestration required under the Budget Control Act of 2011.  Federal grants to states constitute about one-third of total state revenues, and 18 percent of these grant funds are subject to the sequester. Because states differ in the type and amount of federal grants they receive, their exposure to across-the-board cuts would vary significantly. For example, in 2010, federal grants subject to the current sequester were over 10 percent of South Dakota’s revenue, compared with less than 5 percent of Delaware’s revenue.

Similarly, cuts in federal spending on procurement, salaries and wages would affect state economies in different ways. This type of spending accounts for almost 20 percent of the combined state GDP of Maryland, Virginia and the District of Columbia, compared with just over 1 percent for Delaware. Defense, which is the largest area of federal spending on procurement, salaries and wages, varies widely as well. For instance in 2010, federal defense spending made up almost 15 percent of Hawaii’s GDP, contrasted with only 1 percent of GDP in Oregon and Minnesota.

If the full force of the fiscal cliff is realized, the federal deficit would be reduced by $491 billion. However, the Congressional Budget Office has projected that the entirety of the fiscal cliff would be a major driver of a general economic slowdown in 2013. Such an outcome would likely negate the more specific, separate impacts described in the paper.

“Given the uncertainty about whether any or all of the policies in the fiscal cliff will be addressed temporarily or permanently, it is important to understand that the effects of the different components will vary across states,” said Stauffer.

The Impact of the Fiscal Cliff on the States is the first report from a new Pew project looking at the federal-state fiscal relationship. It will examine the effects of federal spending, tax policy and regulatory decisions on the states to enrich policy debates about long-term fiscal stability at all levels of government.

To read the full report, please visit pewstates.org. Download your state fact sheet or download all 50-state fact sheets.

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